4Q Earnings Preview: IMOs, DOL and Rates

Life and annuity company executives, challenged by sluggish premium growth, are expected to offer clues this week on how they plan to sell more annuities through a key distribution channel.

A draft proposal by Department of Labor regulators issued earlier this month restricts the type of independent marketing organizations eligible to apply for exemptions under a new fiduciary rule.

The DOL rule, scheduled for implementation April 10, could be delayed by President Donald J. Trump.

The exemption, which regulators are proposing to phase in over 16 months, is considered a must-have for IMOs looking to sell commission-based fixed indexed and variable annuities.

But under the DOL’s proposal, only the nation’s largest IMOs would be allowed to sell these annuities under a class exemption.

IMOs, who have contracts with insurance companies, recruit thousands of independent agents and are responsible for about $30 billion worth of fixed indexed annuities (FIAs). That figure represents about 50 percent of 2016 FIA sales.

Curtailing which IMOs fall under the exemption is likely to have a significant impact on the independent agent channel as smaller IMOs jockey for position through new alliances and reconfigured arrangements with larger IMO siblings.

Insurers are projected to sell $60 billion worth of FIAs in 2016, an increase of 12 percent over 2015, according to market data.

In the year following implementation of the DOL rule, FIA sales could see single-digit growth at best, but decline by as much as 25 percent at worst, wrote AM Best analyst Ken Johnson in a Jan. 24 report.

Principal Financial Group, a major retirement plan provider, kicked off fourth-quarter earnings season for life and retirement insurers with a conference call Tuesday morning.

After market close Monday, Principal Financial reported fourth-quarter net income of $318 million, or $1.09 per share.

Adjusted for non-recurring costs, earnings came to $1.27 per share. The average estimate of five analysts was for earnings of $1.15 per share.

Torchmark, a holding company for several middle-market life insurers, MetLife, Lincoln National and American Financial Group also report this week. Other large insurers like Prudential an Allianz report later in February.

Interest Rates and Product Changes

Wall Street analysts say the life insurance industry is well capitalized with reserves more than adequate to pay claims. This follows a period of “derisking,” during which insurance companies cut their annuity exposures by sometimes raising prices and often trimming back on benefits.

Management’s ability to maintain adequate spreads and margins with little erosion of credit quality has also helped insurers deliver steady earnings for their investors, said Kroll Bond Rating Agency in New York.

With derisking completed and industry earnings generally steady, industry watchers will be more interested in hearing about product launches or product changes, and how a rising interest rate environment will affect insurers’ bottom lines.

The Federal Reserve has raised its short-term rate by 50 basis points over the past 13 months. Some insurers are repositioning their products to take advantage of the changes.

Voya Financial, which holds its quarterly earnings conference Feb. 8, will launch a new FIA this month to take advantage of higher rates, said Chad Tope, president of annuities and individual life distribution.

Higher rates deliver higher yields and are therefore more attractive to retirement investors than are more conservative banking products as a rising interest rate tide lifts all fixed annuity boats, Tope said.

In anticipation of higher rates in 2017, some insurers developed annuities that credit policyholders based on different benchmarks such as U.S. Treasuries or the London Interbank Offered Rate (LIBOR), Johnson wrote.

Custom or “bespoke” indices are being offered on about 30 percent of new annuity sales to prevent annuity contract holders from turning in their annuities in exchange for other, higher yielding ones, according to Johnson and his analyst team.

“A.M. Best expects that insurers will continue to develop these types of products as they try to adapt to the changing economic and market landscape,” Johnson wrote.

As the investment advice sector moves toward fee-based models, products are expected to become easier to understand, both for investors and distributors. Analysts hope to glean more information on fee-based models as well.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].